THE Reserve Bank's decision to cut interest rates by 50 basis points is a surprise, but on reflection, not an unwelcome one. Bank governor Gill Marcus described the discussion as "robust", which is understandable, because the decision to cut was perhaps in that uncertain zone. Most economists were expecting a cut of some sort, but considered it to be more likely that the decision would be taken somewhat later.
However, if you examine each of the indicators in turn, particularly the most recent, they collectively pushed the monetary policy committee over the edge. The most pertinent of these is inflation which came in at 5,5% for June, slightly below the 5,7% annualised figure for May. This was not only the second decline in a row, but it was also a bit below expectations.
Hence, the inflation threat appears to be waning, at least for now, and inflation is within the Bank's 3%-6% target range.
The second issue is obviously economic growth - the almost constant, global concern for the past few years. Locally, seasonally adjusted gross domestic product (GDP) growth for the first three months slipped to 2,7% from 3,2% in the previous quarter. The Bank's forecast of GDP growth for the year now has been sliced a bit from 2,9% to 2,7% and to 3,8% in 2013.
Of course, GDP indicators are regarded as something of a lagging indicator, and hence would not normally affect an interest rate decision. But in this case, the GDP figures tally with the business confidence index released by the South African Chamber of Commerce and Industry, which plunged to a low last seen in 2002.
Hence, the declines in GDP are seen as a foretaste of things to come, rather than only the result of past economic experience. Even before the previous monetary policy committee meeting, key consumption indicators released by the Bank in its quarterly bulletin for last month, suggest consumption is slowing. Retail sales were down about 100 basis points in April, from the annualised figure of 6,7% reported the month before.
The third factor is international, where not only have growth forecasts been on the decline, but interest rate cuts have been the order of the day. As economist Colen Garrow asked before the decision: "Why would the Reserve Bank be any different, and not add its name to a growing list which now includes Australia, India, China, Brazil, South Korea, the European Central Bank, and the Bank of England which have in one or another way embarked again on a more accommodating monetary policy?"
Presumably, it was not only the trend toward a looser monetary policy, but also the overall state of the eurozone economy more generally. SA's trade with the zone, combined with its trade with the UK, constitutes almost half its total trade. With three of the four major European economies in recession, it can only be a matter of time before the downturn ripples through to the South African economy.
The main arguments against a rate cut were presumably the state of administered prices, which are heading upward strongly and that could have an effect on inflation in the medium term.
The second argument concerns the weakness of the rand.
The former is somewhat mitigated by food prices which now seem a bit more under control. Ms Marcus noted that domestic food inflation was expected to moderate in the short term, and she suggested the medium-term outlook was just too difficult to predict accurately.
This left only the rand standing in the way of a rate cut, and since the volatility of the currency is affected by such a wide range of factors, it was obviously not a sufficient argument in itself.
The big question is whether this cut will actually have any noticeable economic effect. But it certainly won't hurt.